What are Direct Labor Costs?

Definition: Direct labor costs are the wages or salaries paid to employees who physically produce products. In other words, these expenses are the costs paid to workers who make the products that manufactures sell. There is a subtle difference between direct labor and direct labor costs. Labor refers to the actual work that employees do to produce products. Labor costs refer to the amount of money the employer pays the employees to perform the work.

What Does Direct Labor Mean?

Direct labor costs can be traced back and assigned to individual products. For example, a welder who welds all of the bicycle frames that come out of the Schwinn factory is a direct laborer. His labor can be traced directly back to the frames he helps build. This means the costs associated with his employment like wages, salaries, and benefits can also be attributed to the bike frames.

Managerial accountants separate direct labor costs from indirect labor costs to analyze and improve the production process. If labor costs increase because of a raise in minimum wage or union renegotiation, cost accountants might start looking into forms of automation that require less workers to operate.

Example

This idea of automation is not exclusive to manufactures. Grocery stores have been doing this for years. Rarely do modern grocery stores have employees bagging groceries in every check out isle. Instead, the traditional cashier and bagger have been replaced with self-checkout stations that customers can scan, pay for, and bag their own groceries. The self-checkout stations are usually grouped in four to eight units and overseen by a single employee. This way the employer is cutting its labor costs dramatically.

Manufacturers automate with robots that weld, paint, and even assemble. One employee can oversee a line of 10 robots. Thus, the direct labor costs decrease as they are replaced with the fixed costs of the robots.